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David Hendricks: Unclaimed property law can cost businesses plentyWeb Posted: 05/27/2008 07:02 PM CDT
Companies can dread being audited by the Internal Revenue Service. In Texas, another audit lurks that can blindside them, stemming from a law few companies understand.
Beware of the unclaimed properties on your books.
If unclaimed properties have gone dormant and if your company has not taken certain steps to unite the properties with their owners, companies need to move the assets to the custody of the state each year. If not, a state audit will do it for your company. An audit’s results may not be pretty.
Carneiro, Chumney & Co. accountant Michael Schaub said a large San Antonio nonprofit organization recently was staggered by an audit by the Texas Comptroller of Public Accounts.
Schaub declined to name the client. The organization was hit with significant penalties, interest and estimated amounts of unclaimed property going back several years, for which the organization had no records.
In fiscal year 2006, Texas added $448.2 million in unclaimed property from companies to its holdings. It returned $106 million to owners and held $1.5 billion waiting for owners to claim.
Unclaimed property covers more than just abandoned bank accounts. Other types include uncashed paychecks and vendor payments, uncashed dividends or cashier’s checks, securities accounts, utility deposits, safe deposit boxes, insurance proceeds, trust funds, royalty payments, money orders and traveler’s checks.
Some states regard unredeemed merchant gift cards as unclaimed property. Texas exempts gift cards. Some states also exempt business-to-business transactions, but Texas does not.
Uncashed paychecks become dormant after one year. Most other unclaimed properties become dormant after three years. Companies by law should turn the assets over to the state upon dormancy if the owners cannot be located, instead of converting the amounts to income.
Unclaimed properties that become dormant during the 12-month period before each June 30 must be reported to the state by the following Nov. 1.
Money-strapped state governments are stepping up their unclaimed property audits. The penalties, interest and estimated amounts of past unclaimed property can add lucrative revenues to state coffers, Schaub said.
For example, an audit may reveal that a company did not report $100,000 in unclaimed propertyfor the most recent year. The company will pay a penalty and interest on that amount. It also must pay the state that amount to add to its unclaimed property list, along with names of the owners.
The state also, during an audit, may require payments going back up to 10 years, even if the audited company has no supporting records for that period. The amount in unclaimed property can be extrapolated from the period for which the company does have records.
The amounts can multiply to huge sums. Since owners of the extrapolated money are not identified, states can keep that money for their own budgets, Schaub said.
“This is one of the fastest-growing revenue streams for states,” Schaub said. “Texas is one of the latest states to hop on the unclaimed property bandwagon.”
If companies have not complied with unclaimed property laws, they should begin compliance voluntarily as soon as possible, Schaub advised. The state likely will forgo penalties and interest for companies that come forward and also reduce the number of years for extrapolated unclaimed property to four or less.
“The state’s voluntary policy is like the IRS, which will be more forgiving when you come forward than if the IRS finds something in an audit,” Schaub said. “A workout settlement is better than waiting for an audit.”
Schaub said his accounting firm is planning a seminar later this year to inform companies of unclaimed property laws.
“I just don’t think many people know about this,” Schaub said.
dhendricks@express-news.net
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